Wednesday, 7 October 2015

George Osborne announced the biggest shift in financial control from Whitehall to town halls in decades, pledging that local areas will fully benefit from growth in their business rates in the latest phase of his devolution “revolution”.

The chancellor on Monday said he would overhaul the system of local government finance introduced by Margaret Thatcher in 1990, vowing that he would also give councils the power to cut — but not raise — business rates, a uniform tax on the value of business premises.

It's not hard to see where the Tories are going on this one: give the local authorities the power to cut business rates and they will do it, eager to attract businesses to their "low rate area". No doubt businesses will come, lured by the promise of paying less in business rates, but wait. Almost immediately the price of commercial land will rise in these low-rate boroughs. So also will the rents on premises to let. Then rent review by rent review, the commercial rents will rise to the point where the entire saving in rates is absorbed by additional land costs. The net result will be that landlords will have more tenants and higher rents and the local authority, if it is lucky, will find that the increase in business might just about pay for the rate cut.

RT, as far as I remember, that is what happened. I think it was the People's Republic of Lambeth, as it was known then, who were mainly responsible.

I have the opposite type of council here, not loony left, but lazy right. The councillors in the ruling party do f*ck all, just draw their Special Responsibility Allowances and leave everything to the officers.

Sure you can lower rents to attract more business, but that will be below the revenue maximising price i.e the equilibrium. So, councils may well cut BRs and attract more business, but landlords will just put up rents and business will just relocate again.

The savvy business will move regularly from council to council as they drop rates to woo more businesses. It will take a few years for rents to go up to a level that captures the full reduction in rates so they will enjoy a reduction in overall costs, then move to another location.

What I would like to have seen is councils being allowed to shift to at least partial land taxation like they have in parts of Pennsylvania, and of course making the landowner pay so they can eliminate bad debt and minimise collection costs. And also get rid of 80% discount for charity shops.

HB goes directly into landlords' pockets as inflated rents, directly and indirectly because it pushes up rents for competing non-claimants. So £1 HB = £1.50 for landlords.

If HB cuts were matched with a general tax cut (it hasn't been of course, taxes keep going up under the Tories) then only part of that would go into higher rents. Maybe a third, maybe two-thirds, maybe most, but not all. So a £1 tax cut = maybe 50p more for landlords.

HB is a hard one because it's not spread evenly. Middle income earners are priced out of nice-ish areas because their taxes subsidise HB. Everything is artificially flattened out. I personally think scrapping HB will raise rents a bit in middle/nice areas, lower them in very poor areas, but not make much difference overall. By that I mean total aggregate land rent ie £200bn pa. I don't think that would change much.